What is a mutual fund?

A mutual fund is defined as an investment program that is funded by shareholders. This means that individuals pool their money together to create a larger investment vehicle, which is then managed by professional fund managers. The contributions are typically used to purchase a diversified portfolio of stocks, bonds, or other securities, providing investors with an opportunity to invest in a broader array of assets than they might manage individually.

This collective investment structure allows shareholders to benefit from economies of scale, professional management, and diversification—all of which can potentially reduce risk compared to investing in individual securities. Additionally, mutual funds typically offer different classes of shares and can serve various investment strategies, catering to varying investor goals and risk tolerances.

In contrast, a fund that invests solely in real estate would fall into the category of real estate investment trusts (REITs) and would not encompass the broader range of assets that mutual funds do. Similarly, loans provided by banks and insurance policies are distinctly different financial products, focused on lending and risk management, respectively, rather than serving as pooled investment vehicles.